A lawsuit filed Friday in a New York federal court accuses several DraftKings directors of breach of fiduciary duty and unjust enrichment.
The 103-page complaint brought by shareholder Jiahan Yu alleges the defendants caused the company to engage in “illicit operations,” thereby exposing it to “heightened risk of criminal or regulatory enforcement actions.”
This is in relation to DraftKing’s controversial three-way reverse merger with Bulgaria-based software provider SBTech and special purpose acquisition company (SPAC) Diamond Eagle Acquisition Corp (DEAC).
Among those named are the Draftkings founders, CEO Jason Robins, CRO Matt Kalish, and COO Paul Liberman. Another defendant is Shalom McKenzie, the founder and majority shareholder of SBTech. He is now the biggest shareholder in the combined company, with around 11 percent.
Black Market Ops
Yu alleges SBTech has “a long and ongoing record of operating in black markets,” particularly in Asia, which it attempted to conceal prior to the merger by creating a “front” company, BTi CoreTech.
BTi continued the black-market operations, while “ostensibly shielding SBTech and DraftKings from scrutiny,” the lawsuit alleges.
The complaint echoes allegations contained in a report published in June by short-selling activist Hindenburg Research. The report estimated that roughly 50 percent of SBTech’s revenues come from jurisdictions where gambling is illegal.
It also repeats Hindenburg’s claim that one of the tech firm’s clients was 12Bet, whose ownership has been linked to high-stakes poker player Paul Phua. The FBI claims Phua is a “high-ranking member of the 14K triads.”
As a short-seller, Hindenburg had a financial incentive to drive down DraftKings’ shares.
Yu further asserts that the defendants, who were then in control of DraftKings, “willfully or recklessly made and/or caused the Company to make false and misleading statements” concerning SBtech’s operations, so they could benefit financially from the merger.
“The Individual Defendant’s misrepresentations had the effect of misleading the investing public and artificially inflating the Company’s stock during the Relevant Period, during which time at least seven Individual Defendants benefited from lucrative insider sales at artificially inflated prices for proceeds of approximately $825.3 million,” the lawsuit states.
These seven of the Individual Defendants breached their fiduciary duties by selling shares at prices that were artificially inflated due to the Individual Defendants’ conduct in engaging in the Illicit Operations …” it adds.
DraftKings is already the subject of two pending class-action lawsuits which make similar claims. It was also subpoenaed by the US Securities Exchange Commission (SEC) in the wake of the Hindenburg allegations. The company has said it is cooperating with that investigation.
Yu’s lawsuit is a shareholder derivative action, which allows a minority shareholder to sue majority shareholders on behalf of the company. It seeks financial restitution for DraftKings from individual defendants and costs for the plaintiff.
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